Mighty Five countries set to replace China as the workshops of the world

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Low-cost manufacturing played a huge role in making China the second largest economy in the world by 2010, compared to the ninth largest in 1980.

Now China is rapidly moving into medium to high-tech manufacturing as its labor costs have risen.

“A decade ago, China wasn’t even on the map. Now they have the fastest computer in the world, even beating U.S. national labs,” says Michelle Drew Rodriguez, co-author of Deloitte’s 2016 Global Manufacturing Competitiveness Index.

The rise of the MITI-V (“Mighty 5”) – consisting of the Asia Pacific nations Malaysia, India, Thailand, Indonesia, and Vietnam – will be a trend to watch, according to the 2016 Global Manufacturing Competitiveness Index (GMCI) report from Deloitte Touche Tohmatsu Limited’s (Deloitte Global) Global Consumer & Industrial Products Industry group and the US Council on Competitiveness (Council).

All of these countries are expected to be included in the top 15 nations by 2020 and could represent a “New China” in terms of low-cost labour, agile manufacturing capabilities, favorable demographic profiles, as well as market and economic growth.

The prediction is based on an in-depth analysis of survey responses from more than 500 chief executive officers and senior leaders at manufacturing companies throughout the world.

As in the 2010 and 2013 reports, the executives ranked 40 countries in terms of their current and future manufacturing competitiveness and also rated the top drivers of global manufacturing competitiveness (listed below).

Although all but Vietnam showed a drop in overall competitiveness rank between 2013 and 2016, when viewed as a group the MITI-V nations can be seen as offering an attractive option for market and economic growth as well as growing customer base for manufacturers.

“The Southeast Asian countries of Indonesia, Malaysia, Thailand, and Vietnam continue to garner the interest of global manufacturers looking for alternatives to China with the availability of skilled workforce and growing labour productivity, as well as the lower manufacturing labour cost in comparison to China,” said Ng Jiak See, Deloitte Southeast Asia’s Industrial Products & Services Leader.

“Other advantages that these countries offer to global manufacturers include numerous tax incentives in the form of tax holidays ranging from three to 10 years, tax exemptions or reduced import duties, and reduced duties on capital goods and raw materials used in export-oriented production,” added Ms Ng.

From a global perspective, the United States is expected to become the most competitive manufacturing nation over the next five years, with the current leader, China, slipping into second position.

“Made in the USA is making a big comeback,” said Deborah L. Wince-Smith, president and CEO of the US Council on Competitiveness.

“Contrary to the view that manufacturing is falling behind the times, the study points to a manufacturing future characterised by advanced technologies and growth through innovation.

Manufacturing is sustainable, smart, safe, and surging – and America is expected to be among the leaders in this industry transformation.”

According to the report, CEOs say that advanced manufacturing technologies are a key to unlocking future competitiveness.

Predictive analytics, the network connectivity of common objects known as the “Internet of Things” (IoT), smart products and smart factories that are helping to define “Industry 4.0”, and advanced materials are viewed by executives as crucial to global manufacturing competitiveness.

“The US is currently among the top nations unlocking advanced manufacturing technologies including smart, connected products and factories, predictive analytics, and advanced materials that are core to future competitiveness,” said Craig Giffi, vice chairman, Deloitte LLP in the US and Deloitte US Automotive Sector leader.

“The US excels at creating connections and synergy between people, technology, capital, and organisations to form a cohesive ecosystem of innovation, generating tremendous value from investments in research and development.”

Indeed, where emerging economies have an advantage over advanced economies on issues of labour and material costs, advanced economies lead their developing counterparts on labour productivity.

“Singapore, while considered a relatively high cost manufacturing location in Southeast Asia, is still likely to remain amongst the most competitive in the region in the future,” remarked Ms Ng.

“With its highly-educated workforce, an investment-friendly business climate, generous R&D incentives, high quality infrastructure and good governance, the trajectory of Singapore’s manufacturing sector will be one that is propelled by investments in talent and innovation,” added Ms Ng.

2016 Global Manufacturing Competitiveness Index rankings by country1
Current competitiveness Projected competitiveness in five years
Rank Country
2013 rank Rank Country
1 China 1 1 United States
2 United States 3
2 China
3 Germany 2 3 Germany
4 Japan 10 4 Japan
5 South Korea 5 5 India
6 United Kingdom 15 6 South Korea
7 Taiwan 6 7 Mexico
8 Mexico 12 8 United Kingdom
9 Canada 7 9 Taiwan
10 Singapore 9 10 Canada
11 India 4 11 Singapore
12 Switzerland 22 12 Vietnam
13 Sweden 21 13 Malaysia
14 Thailand 11 14 Thailand
15 Poland 14 15 Indonesia
16 Turkey 20 16 Poland
17 Malaysia 13 17 Turkey
18 Vietnam 18 18 Sweden
19 Indonesia 17 19 Switzerland
20 Netherlands 23 20 Czech Republic
21 Australia 16 21 Netherlands
22 France 25 22 Australia
23 Czech Republic 19 23 Brazil
24 Finland 24 Finland
25 Spain 33 25 South Africa
26 Belgium 27 26 France
27 South Africa 24 27 Spain
28 Italy 32 28 Romania
29 Brazil 8 29 Belgium
30 United Arab Emirates 30 30 Italy
31 Ireland 37 31 Ireland
32 Russia 28 32 Russia
33 Romania 29 33 United Arab Emirates
34 Saudi Arabia 34 34 Colombia
35 Portugal 35 35 Portugal
36 Colombia 31 36 Saudi Arabia
37 Egypt 36 37 Egypt
38 Nigeria 38 Nigeria
39 Argentina 26 39 Argentina
40 Greece 38 40 Greece

 

1 Source: Deloitte Touche Tohmatsu Limited and US Council on Competitiveness, 2016 Global Manufacturing Competitiveness Index

Drivers of global manufacturing competitiveness
Drivers 2016 Rank
Talent 1
Cost competitiveness 2
Workforce productivity 3
Supplier network 4
Legal and regulatory system 5
Education infrastructure 6
Physical infrastructure 7
Economic, trade, financial, and tax system 8
Innovation policy and infrastructure 9
Energy policy 10
Local market attractiveness 11
Healthcare system 12

About the 2016 Global Manufacturing Competitiveness Index
The 2016 Global Manufacturing Competitiveness Index (GMCI) report is the third study prepared by the Deloitte Touche Tohmatsu Limited (Deloitte Global) Global Consumer & Industrial Products Industry group and the US Council on Competitiveness, with prior studies published in 2010 and 2013.

This multi-year research platform is designed to help global industry executives and policy makers evaluate drivers that are key to company and country level competitiveness as well as identify which nations are expected to offer the most competitive manufacturing environments through the end of this decade.

The 2016 study includes more than 500 survey responses from senior manufacturing executives around the world.

For more information concerning the specifics of this study and its participants, please visit www.deloitte.com/globalcompetitiveness.

About the US Council on Competitiveness
Founded in 1986, the US Council on Competitiveness is a non-partisan leadership organisation in the United States of corporate CEOs, university presidents, labour leaders and national laboratory directors committed to advancing US competitiveness in the global economy and a rising standard of living for all Americans.

Dedicated to building US prosperity, the Council plays a powerful role in shaping America’s future by setting an action agenda to assess US competitiveness, identify emerging forces transforming the economy, catalyze thought leaders who drive change and galvanize stakeholders to act.

 

China’s transition is opening space for other countries to move into low-cost manufacturing, where China until recently dominated.
Deloitte predicts that the economies of Mighty Five countries set to replace China as the workshops of the world, the “Mighty Five” or MITI-V, will inherit China’s crown for such products.

The consensus among industry and regional experts interviewed for this article is that India in particular will be the next top hub for low-cost manufacturing.

Manufacturing is central to a country’s economic development.

According to a McKinsey report on the future of manufacturing, it “contributes disproportionately to exports, innovation, and productivity growth.”

China, the United States, and Germany are currently among the most 15 globally competitive manufacturing countries in the world.

But in the next five years, according to a survey of industry CEOs carried out by Deloitte, the MITI-V of Malaysia, India, Thailand, Indonesia, and Vietnam are set to enter the top 15 most competitive manufacturing countries.

They are the “new China,” the top economies for low-cost manufacturing (i.e., labor intensive commodity type products like apparel, toys, textiles and basic consumer electronics).

China Gets a Pay Raise

Manufacturing goods in China is now only 4 percent cheaper than in the United States, in large part because yearly average manufacturing wages in China have increased by 80 percent since 2010.

It is in response to this that China, backed by billions of dollars in investment from its government, has vigorously moved into higher value manufacturing.

Dr. Jing Bing Zhang, research director of IDC Worldwide Robotics, agrees with Drew Rodriguez on China’s prowess in advanced manufacturing.

“China is very competitive in this area. They are able to produce very complex products. They are able to skill up handsomely and maintain good quality.

Smartphones, semi-conductors, robots, advanced manufacturing equipment… they’re even moving into airplanes,” says Zhang. As Chinese manufacturing becomes more high value, and workers’ wages are rising, low-cost manufacturing is moving out.

“This has been happening for a number of years – it’s nothing new. Especially shoe-making [and] apparel are already moving out to Vietnam, Indonesia, and even Bangladesh.

China is really focusing on upgrading industry into medium to high tech,” Zhang says.

The “MITI-V” – Which Is the Mightiest? 

Manufacturing experts see a varieity of areas as important for low-cost manufacturing competitiveness: young populations, low labor costs, a supportive policy environment, good quality infrastructure, availability of engineers, a minimum level of education for all workers, economic growth and a large internal consumer market.

The different economies all have their distinct advantages and disadvantages but China’s equally giant neighbor to the west stands out from the crowd.

“My opinion is that India has the potential to be the next hub for low-cost manufacturing,” says Zhang. He sees India as being the next center for electronics assembly.

He points to Chinese consumer appliances giant Huawei, which in September announced that it would manufacture three million smartphones a year in India, and Foxconn, the Apple supplier, which is opening a $10 billion iPhone manufacturing plant in India.

In particular, India’s strengths are its mixture of high- and low-skilled labor and the potential to sell to its huge market of 1.2 billion consumers.

Although much of the population is poor, their incomes are rising. “India has a large base of university graduates. This is very important. You still require manufacturing engineers; you also need design engineers. You need supervisors. And India has a large base of well-educated graduates. They compare very nicely to other countries in the MITI-V,” says Zhang.

India’s policy environment is also becoming much more supportive of manufacturing. The Indian government launched the “Make in India” campaign in 2014, which aims to increase the level of manufacturing in the country.

The government has achieved some success – India overtook China in 2015 as the country receiving the most foreign direct investment globally and companies have reported improving administrative efficiency at the federal level.

Despite all these positives, India has many challenges. In order to have a flourishing manufacturing base, workers need to be able to at least read and write to operate machinery. India scores low on general skills attainment, ranking 105th in the world according to the UN’s Human Capital Index 2016, lower than any other MITI-V nation. India’s infrastructure is woeful, in particular transport and energy supply, where it ranks lower than most other emerging economies. Government inefficiency is also a major stumbling block – delays in land acquisition and environmental clearances have stalled more than 270 projects across the country.

Nevertheless, India’s huge market, low costs, and positive noises from the government make it unavoidable for any manufacturer looking to produce bulk commodity products. According to Drew Rodriguez, there are major signals, such as “graduation rates, government and regulatory nods,” that may cement India’s position as the next low-cost manufacturing hub.

A senior engineer at BSH Hausgeräte GmbH, the largest home appliances manufacturer in Europe and a major investor across Asia, who works closely with low-cost Chinese manufacturers, also agrees: “India is the future. Infrastructure is not so good but they have so many people,” he says. However, he has also seen Chinese companies moving into Vietnam due to its very stable political environment.  Indeed, Malaysia, Indonesia, Thailand, and Vietnam all have their own benefits and some similarities with India.

“The fundamental risks of the global south are not there,” says Dr. Carlo Bonura, region head of Southeast Asia at political risk consultancy Oxford Analytica, referring to the Southeast Asian nations of the MITI-V. There are few risks of expropriation of assets or labor risks, for example. According to Bonura, “This is a region where all the major regimes, regardless if they’re democracies or autocratic, they recognize [the] importance of sequestering political instability from economic stability.” This contrasts with India, which before current Prime Minister Narendra Modi was well known among international investors for being unwelcoming to foreign businesses.

Both Bonura and Zhang see Thailand and Malaysia as more focused on high- and medium-tech manufacturing rather than being the next centers of low-cost manufacturing. Thailand has strong automotive, electronics, food, and chemicals industries, while Malaysia has strong chemicals, machinery, and rubber processing industries. This is borne out in the relative prosperity of the MITI-V countries as Malaysia and Thailand are by far the richest of the group.

That leaves Indonesia and Vietnam. “I hear from a lot of companies that they are moving to Vietnam…wages are half that of China,” says the senior engineer at BSH Hausgeräte GmbH, who also thinks that Vietnam’s very stable political environment is advantageous. Vietnam also has better infrastructure than Indonesia and the advantage of being close to China.

“The problem for Indonesia is the state’s capacity to implement industrial strategy; the state is highly decentralized and there are huge infrastructure issues. You don’t have these challenges in Vietnam; Vietnam is also a smaller country,” says Bonura. Yet Vietnam’s population of 95 million is smaller than Indonesia’s population of over 255 million and therefore represents a smaller potential consumer market — an neither country compares to India huge population.

The Rise of the Robots

It seems clear therefore that India is the manufacturing industry’s pick as the mightiest of the MITI-V for low-cost manufacturing. Indeed, Deloite’s report already has India as the 11th most competitive manufacturing country globally, thereby piercing the top 15 earlier than any of the other MITI-V countries.

Yet for all the talk of the MITI-V countries taking over China as workshops of the world, a nagging fear will stalk policymakers in India and other MITI-V countries. With robots becoming ever more sophisticated, analysts are predicting manufacturing will employ far less people in the future. Martin Ford’s bestselling 2016 book The Rise of the Robots: Technology and the Threat of Mass Unemployment paints a bleak picture of whole swathes of professional sector jobs, let alone low-cost manufacturing, being automated. Commentators and policymakers in India in particular seem downbeat on India conjuring up a jobs boom like China experienced during its rapid growth.

Should they be so worried? Zhang and Drew Rodriguez do not think so. “The MITI-V are still going to be very competitive for the next decade plus,” says Drew Rodriguez. Zhang is not pessimistic either: “I am the opposite. There are different schools of thought…  From my research, I don’t see it. Maybe we will be less dependent on human labor. But there is no way this will eliminate the need for people in the next 15-20 years. We are entering high speed growth for robotics but in 2014 global density for robotics was still very low at 66 per 10,000 employees, 36 in China, 57 in Thailand, and close to none in India.”

Other roadblocks lie in wait for the MITI-V, such as the threat of protectionism, which is all the more real after U.S. President Donald Trump’s call for tariffs on Chinese imports and threats to companies moving jobs away from the United States. But this does not seem to be dampening the prospects of the MITI-V just yet. “Every month, every year, the world is a more connected place,” says Drew Rodriguez.

All of the MITI-V have their own distinct advantages but India’s huge internal market and low labor costs give it the edge. However, this is not to say that other MITI-V countries will not also become “new China” hubs for low-cost manufacturing. This will be the case regardless of the threat from robots or protectionism. “I haven’t seen anything in the recent shift that would lead me to change my impression of the competitiveness of the MITI-V,” adds Drew Rodriguez.

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